Teenagers & Building Their Financial Future & Credit

The importance of managing money
Many teens have no idea on how to manage money. Mention the importance of saving it and how it doesn't grow on trees and their eyes glaze over. Even more important is the complete lack of understanding of credit and how it works. What are its advantages and disadvantages? Is a low balance credit card good for teenagers in helping them understand credit's pitfalls? Understanding how credit works is crucial for young people, especially as they look at buying their first car or home.

Here's a few tips to help your teen understand the importance of their finances from Brady Smith at TrueCredit:

• Understand finances - Students need to understand exactly where their finances stand. Regularly reviewing financial statements along with their credit reports from all three credit reporting companies is a good way to understand where they stand at any given time.



• Watch for danger signs - Negative records such as late payments and collection accounts can remain on credit reports for 7 years. Students can keep their future finances healthy by avoiding these problems from the beginning. Library, cell phone and video store late fees can sometimes be turned over to collection agencies who may then report them to the credit reporting companies. So graduates should keep an eye out for these as well.



• Create a spending plan - Developing a monthly spending plan can help students understand how much they need to pay toward their debts and how much they can afford to splurge. Generally, low interest rates make it possible for graduates to spread their student loan payments over the life of the loan, but they should focus on paying off high interest credit card debts as soon as possible.



• Prepare for emergencies - A few preparations for the worst-case scenario can help students and recent graduates avoid financial problems in an emergency. To start, they should build up enough savings to cover their expenses for two to three months. If they find themselves out of a job or unable to pay back their debts, graduates should immediately call their creditors and lenders to explain the situation. Many federal loan programs have deferment and forbearance programs that allow borrowers to put their debts on hold temporarily.

Save, save, save
Anytime you educate someone about credit you should start by teaching them how to save money. With teens, teach them the importance of setting money aside, such as a savings in case of an emergency.

"I recommend educating teens about the basic priorities in life – paying for housing, basic food, and basic utilities first, not DVDs, concert tickets, ring tones on your cell phone, or the hottest fashion unless you have money to spare," explains Kathy Jo Pollack, a certified life coach and trainer.

Teach them "...how to read and understand bank and credit card statements, and balance a check book. These are things that parents or another adult can do."

She suggests starting teens with a checking account and a debit card before making the leap into credit.

"Have the teen make deposits and withdrawals, while making sure they document each transaction and balance their monthly statement immediately. This will be a good foundation. Many banks offer a student type checking account with a debit card. Let them get experience with their own money first before they learn the hard way with someone else's," Pollack said. A low balance credit card is a good start, but make it mandatory that the balance be paid off each month.

Credit: Taking the good and the bad
To the everyday man or woman, credit becomes a part of life. But it doesn't need to become a problem. Good credit means you have the upper hand during negotiations. Bad credit leads to high interest rates and becomes a hindrance to paying off debt.

If you're responsible with your credit card, the card company will report you in good standing to the credit agencies that track credit reports. This helps build a good credit score. It's one of the fastest and easiest ways to build credit.

Consequently, there are monthly payments that don't do anything to build credit. Paying rent, medical and utility bills on time don't do anything for your credit. Only if you pay late. Then, instead of helping your credit, their reports of late payment can damage your credit for years.

So your teen wants to buy a car...
As I've explained, good credit is the basis to any positive experience when borrowing money. Making payments on time and keeping credit card balances low are two ways to excellent credit. You've probably heard someone tell you to pay in cash and stay away from credit cards and loans. Unfortunately, not many of us can pay cash for a car, at least not something reliable. Not many parents are comfortable with their teen driving a beater to school or work.

With all of this in mind, buying a car is a big step. Is your teen responsible? Do they understand the importance of making the payment, as I've discussed here? And maybe the most important question, can they make the payment? Only you and your teenager can make these decisions. Many teens only work part-time, especially if they are in school. Are you prepared, as the parent, to make the car payment for them if they can't?

If everyone is happy waiting six months or a year, your teen can get a low balance credit card and work on building their credit. Monitor their purchases and check that the balance is paid off every month. With several months of on-time payments under their belt, you and your teen can start checking into car loans. With credit established from the credit card, your teen should be able to get a good interest rate. But don't buy more car than they need. As I mentioned above, something reliable for school and work is the goal without going overboard.

Keeping your teen's feet planted and everything in perspective will help keep them out of credit trouble. As a parent, take the time to explain the in's and out's. It will only benefit your kids now and in the future.

Andy Mrozinski

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Building Credit To Buy A Car

Dear Miss Mota Mouth,

I would really like to buy a car now but I don’t have any credit yet even though I have a job. At least I don’t have bad credit but what should I do? My current car is a real clunker and I am 25 and want a nice car!
Whitney in Costa Mesa

Dear Whitney,

The first step is to really start shopping around banks, credit unions and even insurance companies like State Farm who will finance you. Get a good idea of what their rates would be with your credit currently undeveloped. Interest rates can legally be as high as 29.9% but you shouldn’t accept anything more than 10% or you will be a slave to the lender.

Consider keeping the clunker for a while and starting a program to improve your credit:
1. Take out a credit card or two that you pay off in FULL every month
2. Ask your parents to add you as a responsible party to a credit card of theirs (but do not use it yourself- just gain the credit history)
3. Make sure that you have no outstanding debts to any bills like utilities from past rentals, medical bills, etc and if you have those- pay them off and ask the collection agency to take them off your credit. (if they say they will then they have 5 business days to notify you that they have done so)
4. Don’t repeatedly pull your credit report because that will knock points off automatically.

After even 6 months you will start to gain a solid credit history that lenders will like.

Patience is indeed a virtue and jumping ahead will bite you where it hurts so take the correct steps to do this the right way.

Good luck!

M

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Spoiled? Car Debt and What it is Costing Our Parents

There has been some devastating news coming from the mortgage industry of people over borrowing for their homes or getting into loans that they did not fully understand. But this crisis is not limited to the housing market: it is quickly becoming a problem with the way that we buy our cars.

In a recent article in the LA Times(subscription required) and summarized in Kicking Tires, it was pointed out in an ominous way that the amount of people who couldn’t pay their car payments for 60 days was up by 20%. Additionally the average car loans are now much longer than in the 1980s and 90s- 45% of all car loans are for 6 years or longer. It is becoming common that these longer loans are in reality for more than one car because buyers are driving cars for 4 years or less and then trading in that car, debt and all, for newer and more expensive cars. The debt owed on the old loan is rolled into the new loan and the cycle begins to spiral from there with some consumers these days paying for 3 loans or more in a single car loans and owing, in some cases $30,000, in debt on a single car worth far less.

These statistics may begin to uncover an inevitable time bomb for the spoiled babies of the Baby Boomers but a similarly frightening reality is beginning to reveal how this affects the parents that raised these consumers who expect so much for themselves!

Another study done in the UK by MoneyExpert.com shows that almost 25% of parents have had to help their adult children with their car debt when they have become delinquent in their payments. The expensive reality of raising a child has now extended beyond childhood, into adulthood and threatens parents who are now in their 50’s to compromise their hard earned savings and their ability to maintain their retirement and health care needs. The real irony is that adult children today are beginning to literally spend their own inheritance at the cost of compromising their very alive parents.

So what is the solution to protecting our Gen X dollars, and more importantly, our parent’s money? We should take a ticket from their book: our parents drove their cars for much longer after they were paid off and took on much shorter loans. Today it is common to get financed on a car for 6-8 years but our parents usually had 3-4 year loans, reducing the amount that they were paying in heavy interest. Also, cars are expensive these days so foregoing a need to have a brand-spanking new car and instead choosing a car that costs less, is 2 years old at least so has lost the majority of it’s depreciation and has a loan that is realistic for long term goals.

Buying smart not only protects your hard earned money but the savings of your parents.

A great series this week at CreditWithdrawal.com about saving money as we age for retirement.

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Cosigning a Car Loan: Should you Cosign?

We have all seen it happen- sometimes to friends, sometimes to family and sometimes to our stunned selves. The story is like this: a buyer falls in love with a car and the dealer starts to seal the deal, leaves the buyer while he goes to start the paperwork for he financing, comes back and announces that the buyer’s credit isn’t good enough to qualify for that car and is there a friend or family member who would be willing to cosign on the loan with them? Not that there aren’t any other big myths flying around that car lot but this entire scenario sums up some of the biggest ones!

Myth: Your credit score isn’t high enough to qualify you for a loan.
Truth: Your credit score isn’t high enough for the dealership to give themselves as hefty a margin of mark up on the APR that they would like to make.

Myth: Having a cosigner will help you build your own credit.
Truth: The person with the high credit score will be the primary on the loan and it does not help the person with the lower score.

Myth: Cosigning for someone does not hurt your credit at all.
Truth: If you are the primary on a loan as a cosigner it will change your debt to income ratio so other lenders will take the debt into consideration if you try to get another car loan or a house loan. It could make you ineligible for either one if it doesn’t appear that you make enough to cover everything.

What should you do?

If you are being told to find a cosigner, find your own financing at a bank, credit union or even an insurance company like State Farm. Don’t put a friend or family member at risk of lowering their chances of buying things for themselves. Do not go to the car lot without comparing rates and getting prefinanced.

If you are being asked to cosign, politely decline and guide the buyer towards finding alternative financing sources. Beyond the logistics explained here, there is also the risk that the buyer will default on the loan or your relationship will not always be as close as it is today and it is like being tied to someone forever that you may not want to have financial ties with.

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Buying a New Car or Slightly Used?

There is something in the air- I mean, I am not an economist but there is trend that I am seeing repeatedly in the search terms people are using to hit my blog and the many questions that I see coming across the Buying & Selling forum within Yahoo Answers: people want out of expensive new car loans and into less expensive cars.

Now I have addressed that issue several times now but what if I could get people before they get into that dangerous loan zone where they end up upside down and in over their head?

If I could stand in the street with a big sign (on a soap box, of course), I would tell everyone to buy slightly used and here is why:

1. A car depreciates most the first year of its life- as much as 30% and after the 2nd year, a typical car is worth 60 % of its original cost.

2. Cars are now more reliable than ever with most models having a life expectancy that when properly maintained, will last a whopping 15 years or 225,000 miles!

3. Extended warranties on new cars from dealers will not usually cover the things that really need to be fixed so buying without a warranty will save you a load of cash.

4. More lenders- banks, savings and loans and insurance companies are offering financing for buyers who want to buy used from private parties because they know that they will be saving money.

Of course there are arguments why buying brand new with cash and hanging onto a new car forever is a good move but for those of us who need financing, saving interest payments on 2 years of massive depreciation is the best idea ever.

Just remember- when buying online and from private parties, invest in an Experian AutoCheck and get a qualified mechanic to give it the once over.

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